Taxability of proceeds from key man insurance policy
06 November 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: My client has
contributed to key man policies for many years.
We have added back the full premiums since the change of S11(w) came
into effect in July 2012.
The policies were paid out to my client in June 2014 and we
included it in the gross income of the company.
We received tax directives from SARS for these payouts in the name of
the members and we deducted PAYE from these policies. The same amount of the
payout included in the gross income of the company were debited to the income
statement again in employee costs.
Are these policies taxed in the hands of the members
(individuals), if so, please advise where it is stated in the Act. Is it taxed as income or capital?
A: The facts
provided refer to the fact that the ‘client … contributed to key man policies’,
but it is then stated that it was ‘included in the gross income of the
company’. From the facts it then seems
clear that the proceeds of the policies were not paid out by the insurer to the
employees – it was paid to the company (as policyholder). The company in turn decided to pay the amount
to the employee and this is presumably in terms of the employment
contract. As such the amount would be in
respect of services rendered and therefore gross income for the employees. This is in terms of paragraph (c) (or
possibly (d)) of the definition of gross income. Paragraph (m) of the definition of gross
income does not apply in this instance and the exemption under section
10(1)(gG), (gH) or (gI) is also not applicable.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.